We Think TransCanna Holdings (CSE:TCAN) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, TransCanna Holdings Inc. (CSE:TCAN) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for TransCanna Holdings

What Is TransCanna Holdings's Debt?

The image below, which you can click on for greater detail, shows that at August 2021 TransCanna Holdings had debt of CA$15.3m, up from CA$13.6m in one year. However, it also had CA$807.6k in cash, and so its net debt is CA$14.5m.

How Healthy Is TransCanna Holdings' Balance Sheet?

We can see from the most recent balance sheet that TransCanna Holdings had liabilities of CA$6.36m falling due within a year, and liabilities of CA$13.6m due beyond that. On the other hand, it had cash of CA$807.6k and CA$605.1k worth of receivables due within a year. So it has liabilities totalling CA$18.6m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$24.6m, so it does suggest shareholders should keep an eye on TransCanna Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since TransCanna Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year TransCanna Holdings had a loss before interest and tax, and actually shrunk its revenue by 52%, to CA$3.0m. To be frank that doesn't bode well.

Caveat Emptor

Not only did TransCanna Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$5.7m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$7.0m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 6 warning signs for TransCanna Holdings (2 are significant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.